The Irish government has published a final draft ICAV ("Irish Collective Asset-management Vehicle") Bill (the "Bill") which, once enacted, will allow the incorporation of a new, tax efficient and innovative corporate structure for Irish investment funds.
Formal enactment of the Bill is expected to occur in Q3 or Q4 of 2014 and the Central Bank of Ireland ("CBI") has committed to authorising the first ICAVs shortly thereafter allowing asset managers to make use of the ICAV structure before the end of the year.
Initial industry feedback estimates that hundreds of ICAVs will be formed in the initial phases representing billions of euros. As a result, it will immediately become one of the most popular legal forms for Irish funds.
What is an ICAV?
The ICAV will sit alongside the existing public limited company ("Irish plc") structure, which has been the most successful and popular of the existing Irish fund structures to date. It will also complement other available legal forms of Irish regulated funds which include the unit trust, limited partnership and the common contractual fund ("CCF") and can be used in conjunction with these funds as master-feeders or parallel fund structures. Like other regulated fund structures, the ICAV will be established by way of a filing with the CBI and can seek authorisation as either a UCITS or alternative investment fund ("AIF") structure.
Who can use the ICAV?
The ICAV will be available to both new and existing structures, as an Irish plc will be able to convert to an ICAV following the Bill's implementation. Eligible offshore funds also have the option to migrate to Ireland and be established as an ICAV by way of continuation.
Advantages of the ICAV
The principal advantage to an investment fund established as an ICAV is that it will have its own specific legislative code and will not be impacted by amendments to certain pieces of European and Irish company legislation which are targeted at ordinary companies rather than investment funds, but which currently impact on Irish plcs. This should result in a more straightforward set of legal rules applicable to an ICAV, with resulting lower administration costs.
In addition, the Irish plc is currently considered to be a "per se corporation" for US tax purposes. As a result, a "check-the-box" election for US tax purposes is not available in respect of an Irish plc and, accordingly, it is generally treated as a separate entity for US tax purposes. A key advantage of the ICAV is that it will not automatically be considered a corporation for US tax purposes. Instead it will be possible to make an election under US "check-the-box" tax rules in respect of the ICAV, in order for it to be classified as a partnership or disregarded entity. It is understood that this feature of the ICAV should enhance the attractiveness of Irish funds to US investors and managers who, to date, have traditionally established Irish funds as unit trusts in order to achieve this result. In this regard, it is considered that the ICAV may be regarded as a more suitable fund vehicle than a unit trust by certain investors and managers.
Notable features of the ICAV
An ICAV may be established as either a single fund or as an umbrella structure with a number of sub-funds and share classes. The Bill specifically provides for robust segregation of liability between sub-funds in umbrella structures.
The Bill allows for the preparation of separate sub-fund accounts for an ICAV. This will be a very important feature for managed accounts and large multi-manager structures as currently Irish plcs have to produce one set of accounts for the entire umbrella which mandates a single year-end date and the ability of investors in one sub-fund to receive financial details for investors in others.
The ICAV is not subject to the principle of risk spreading (unlike the Irish plc which must spread investment risk) which will facilitate single asset deals, e.g. single property holdings or exposure to a single issuer.
In the case of changes to the ICAV's instrument of incorporation ("IOI") there will be no requirement to obtain prior investor approval where the depositary certifies that changes to the IOI do not prejudice the interests of investors (similar to the requirements relating to changes to the trust deed of a unit trust).
To reduce the administrative burden on funds, directors of an open-ended ICAV are permitted to elect to dispense with the holding of an annual general meeting ("AGM") by giving written notice to all of the ICAV’s shareholders. There is a safeguard in that shareholders holding 10% or greater of shares can demand an AGM.
Below is a comparison table of the key features of ICAVs and PLCs.
Click here to view table.
Conversion of Irish plc to ICAV
The Bill allows an Irish plc to convert to ICAV status by way of continuation. In order to do so a filing will be required to be made with the CBI including the Irish plc's current and intended constitutional documents together with a statutory declaration of a director confirming, amongst other matters, the solvency of the Irish plc and consenting to the proposed conversion.
The Bill also allows for the registration of an eligible migrating company with the CBI as an ICAV by way of continuation (i.e. keeping its performance track record).
Irish Tax Treatment of the ICAV
The ICAV will constitute an investment undertaking for Irish tax purposes and will be subject to the same gross roll-up regime that currently applies to existing Irish investment funds, AIFs and UCITS. Broadly, this means that any profits and gains of the ICAV will be exempt from tax in Ireland subject to certain conditions. It should be noted that Irish authorised funds established as CCFs and limited partnerships are, in fact, subject to a different Irish tax regime, in that they are regarded as "tax transparent" and are not taxable at the fund level, but rather, the income and gains of the fund are attributable to the investors.
There may be further changes required to the Irish tax legislation (including the Irish Taxes Consolidation Act 1997 as amended and the Stamp Duties Consolidation Act 1999) to deal with certain ancillary items, including ensuring that the conversions, mergers and re-domiciliations referenced in the Bill can occur in a tax neutral manner. These changes should be included in the Finance Act later in the year.
The final step is the formal consideration of the Bill by the Irish Houses of Parliament and, once approved, the signing into law by the President which is expected before the end of 2014.